Managerial Accounting Quiz: Make Or Buy Decisions

3 questions · exam conditions

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Make Or Buy DecisionsQuestion 1 of 3

AccuParts currently produces Widget X with these annual costs for 10,000 units: materials $120,000, direct labor $80,000, variable overhead $40,000, allocated fixed overhead $60,000. A vendor offers Widget X for $26 per unit. If AccuParts stops producing Widget X, it can use the freed capacity to produce Widget Y, which would generate additional annual contribution margin of $35,000. However, Widget Y production would require hiring a part-time supervisor for $15,000 annually.

What is the net annual benefit (cost) of outsourcing Widget X production?

$20,000 annual benefit

$0 (break-even decision)

$40,000 annual benefit

$20,000 annual cost

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Managerial Accounting Quiz

Managerial Accounting Quiz: Make Or Buy Decisions

Practice Make Or Buy Decisions in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Make Or Buy Decisions, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

What is the net annual benefit (cost) of outsourcing Widget X production?

$20,000 annual benefit
$0 (break-even decision) (correct answer)
$40,000 annual benefit
$20,000 annual cost

Explanation: Current relevant cost to make = $120,000 + $80,000 + $40,000 = $240,000 annually (excluding allocated fixed overhead). Cost to buy = $26 × 10,000 = $260,000 annually. Additional cost of buying = $20,000. But opportunity benefit from Widget Y = $35,000 - $15,000 = $20,000 net. The $20,000 additional cost of buying is exactly offset by the $20,000 net opportunity benefit, resulting in break-even. Option A ignores the supervisor cost. Option C ignores both the cost increase from buying and supervisor cost. Option D only considers the direct cost increase from buying.

Question 2

FlexManufacturing produces Component K with the following monthly costs for 5,000 units: direct materials $50,000, direct labor $35,000, variable overhead $25,000, and fixed overhead $40,000. The fixed overhead includes equipment depreciation of $15,000 that would continue regardless of the production decision, and $25,000 of other costs that could be avoided. A supplier offers Component K for $24 per unit with a minimum order of 5,000 units.

If FlexManufacturing has no alternative use for the production capacity, what is the monthly financial advantage or disadvantage of accepting the supplier's offer?

$15,000 monthly advantage of buying (correct answer)
$10,000 monthly advantage of buying
$5,000 monthly disadvantage of buying
$25,000 monthly disadvantage of buying

Explanation: Relevant monthly cost to make = $50,000 + $35,000 + $25,000 + $25,000 = $135,000 (excluding the $15,000 unavoidable depreciation). Monthly cost to buy = $24 × 5,000 = $120,000. Monthly advantage of buying = $135,000 - $120,000 =

15,000. Option A is correct. Option B (

10,000) likely includes some unavoidable costs. Option C suggests buying is disadvantageous, possibly from including all fixed costs. Option D ($25,000) might result from incorrectly including unavoidable fixed costs in the analysis.

Question 3

GlobalTech manufactures 15,000 units of Part M annually. Current costs per unit are: direct materials $18, direct labor $14, variable overhead $6, and fixed overhead $10. The fixed overhead represents equipment depreciation and facility costs that will continue regardless. An overseas supplier offers Part M for $42 per unit, but GlobalTech would incur additional costs: incoming inspection $1.50 per unit, higher inventory carrying costs $0.50 per unit due to longer lead times, and import duties of $3.00 per unit.

What is the relevant cost comparison per unit between making and buying Part M?

Making costs $38 per unit; buying costs $47 per unit (correct answer)
Making costs $48 per unit; buying costs $47 per unit
Making costs $38 per unit; buying costs $42 per unit
Making costs $48 per unit; buying costs $42 per unit

Explanation: Relevant cost to make = $18 + $14 + $6 = $38 per unit (excluding fixed overhead that continues regardless). Total cost to buy = $42 + $1.50 + $0.50 + $3.00 = $47 per unit. Option A is correct. Option B incorrectly includes fixed overhead in the make cost. Option C ignores the additional costs of buying. Option D includes both errors: fixed overhead in make cost and ignores additional buying costs.